Issue Your Preliminary ESOP Diversification Forms by March 31st

Posted by Kevin Rusch on Tue, Feb 26, 2013

diversificationAs a Plan Sponsor of a mature ESOP with a December 31st plan year end, you need to be aware of the Internal Revenue Code's ESOP Diversification requirements that apply to your plan.

The ESOP Diversification rules provide that an ESOP must allow qualified participants to diversify a portion of the employer securities held in their account.  A “qualified participant” is an participant who has completed at least 10 years of participation in the plan and has attained age 55.

A “qualified participant” must be allowed to choose to diversify up to 25% (on a cumulative basis) of the total number of shares of Company Stock acquired by or contributed to the Plan that have ever been allocated to their Company Stock account during the first five years of the Eligible Period and up to 50% (on a cumulative basis) of the total number of shares of Company Stock acquired by or contributed to the Plan that have ever been allocated to their Company Stock account in the last year of the Eligible Period.

IRC Section 401(a)(28) requires that eligible participants be given an election to diversify during the first 90 days of the plan year.  There is no formal guidance from the IRS for situations where the amount eligible to diversify is not yet determined due to the ESOP allocation and stock valuation not being completed by the 90 day deadline.  An ESOP community best practice is to distribute a revocable preliminary diversification form to show a good faith effort to satisfy the 90-day election requirement.  After the final account values become available and diversification amounts are computed, Final Diversification Election Forms should be prepared and distributed to the qualified participants.

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Topics: Compliance, ESOP Administration, ESOP diversification

Kevin Rusch
Written by Kevin Rusch

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